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SALIENT FEATURES OF

THE FINANCE BILL, 2013

DIRECT TAXES

VED JAIN

Salient features of the Finance Bill, 2013 by Ved Jain

2 VED JAIN AND ASSOCIATES

ABOUT THE AUTHOR

Mr. Ved Jain is a fellow member of the Institute of Chartered Accountants of India. A science graduate, he passed the Chartered Accountancy examination in the year 1976 and was in the merit list in both the Intermediate and Final examinations of the Institute. He did BA (Economics) from Punjab University and LL.B from University of Delhi in the year 1980. On 5th February, 2007 he was elected by the Central Council of Institute of Chartered Accountants of India (ICAI) as its Vice- President and was further elevated to the post of the President on 5th February, 2008. During his tenure as president, The ICAI has earned various credentials, which embark a new era of professional development. He was appointed as a member of the Income Tax Appellate Tribunal (in the rank of Additional Secretary) by Ministry of Law, Justice and Company Affairs, Govt. of India. He was appointed as Government Nominee Director on the board of MAYTAS Infra Limited now renamed as IL&FS Engg. & Construction Limited and MAYTAS Properties Limited post Satyam episode to rehabilitate these companies, which he has been able to revive successfully. He has been appointed independent director on the Board of National Aluminum Company Limited, a Navaratna Public Sector Undertaking, PTC India Limited and PTC Financial Services Limited. He is Chairman, Committee on Direct Taxes of ASSOCHAM. A prolific writer, having command in Hindi, English, French, Urdu and Punjabi. Mr Jain specializes in taxation, and practising as advocate. He has authored many books on Direct Taxes and regularly contributes articles in various journals and newspapers.

He can be reached at [email protected]


VED JAIN AND ASSOCIATES 3

Salient Features of the Finance Bill, 2013

DIRECT TAXES

VED JAIN

INTRODUCTION

Mr. P. Chidambaram, after reassuming the office of Finance Minister,

presented his first Budget and also the last Budget of the UPA-II

Government. This budget was keenly watched not only by people in India

but also by the foreign investors. The Finance Minister had the challenge

to revive growth without increasing fiscal deficit. He had a challenge to

increase revenues without raising taxes. He had a challenge of enough pre-

election populism without increasing expenditure. He had a challenge to

revive investment and saving without more doles. He had a challenge to

rein in inflation without choking growth.

In this backdrop, the Finance Minister presented a cautious Budget seeking

support of all sections of the House as well as people of India to navigate

the Indian economy through a crisis that has enveloped the whole world

and spared none. The Finance Minister has not tinkered with tax rate

structure both under direct and indirect taxes. He has not also levied any

new taxes as was being widely debated except commodity transaction tax

on non-agricultural commodities. Despite all the constraints, the Finance

Minister has been able to contain the fiscal deficit for the current year at

5.2 and has projected a fiscal deficit of 4.8% in the next year. The Finance

Minister in his Budget speech has promised to bring the Direct Taxes Code

(DTC) back to the house before the end of the Budget session. However,

on Goods and Service Tax (GST) he has not made a commitment about the

time. He has only hoped to take the consensus on GST forward in next few

months and bring a draft Bill on the constitutional amendment and a draft

Bill on GST. The Finance Minister also made a statement to ensure clarity

in tax laws, a stable tax regime, non-adversarial tax administration, a fair



mechanism for dispute resolution and an independent judiciary. To adopt

best global practices the Finance Minister has proposed to set up a Tax

Administration Reform Commission to review the application of tax policies

and tax laws and submit periodic reports that can be implemented to

strengthen the capacity of the tax system.

Coming to the amendments on direct taxes, the Finance Bill, 2013 has 53

clauses amending the various provisions on direct taxes. The various

amendments proposed in the Finance Bill, 2013 are analyzed below.

Unless otherwise stated all these amendments are proposed to be effective

from April 1, 2014 i.e. assessment year 2014-15 relevant to the income

earned in the financial year 2013-14.

A. TAX RATES

1. No increase in threshold limit – credit of Rs.2000 for individual tax

payer having income upto Rs.5 Lac

The Finance Minister has proposed no changes in the current slabs of

income tax. The existing threshold exemption accordingly continues to be

the same for individual, HUF, association of persons, body of individual and

every juridical person, as under:-

Income Tax Rate

Upto Rs.2,00,000 Nil

Rs.2,00,001 - Rs.5,00,000 10%

Rs.5,00,001 to Rs.10,00,000 20%

Above Rs.10,00,000 30%

However, the Finance Minister has proposed to allow credit to an individual

resident in India whose total income does not exceed Rs.5 Lac. The tax

credit shall be equal to the tax payable or Rs.2000 whichever is less. The

implication of this will be that an individual resident having taxable income



up to Rs.2,20,000 shall not be required to pay any tax. This credit shall be

available only to individual resident and as such HUF, AOP, etc. shall not be

entitled for this deduction. Similarly non-resident individual will also not be

entitled for this deduction.

No change has been proposed in the threshold exemption for the senior

citizens (of 60 years to 80 years of Rs.2,50,000) and for very senior citizen

(above 80 years of age of Rs.5 Lac). Since the proposed tax credit of

Rs.2000 is for resident individual, senior citizen between 60 years to 80

years of age shall get benefitted if the total income does not exceed Rs.5

Lac. Such senior citizen will be required to pay tax over and above income

of Rs.2,70,000. However, in case of very senior citizen, threshold

exemption being at Rs.5 Lac, they will not be entitled to take benefit of this

tax credit.

The ceiling of Rs.5 Lac is with reference to the total income after all other

deductions such as deduction under Section 80-C in respect of long term

savings like life insurance premium, provident fund, deduction under

section 80D in respect of health insurance premium, etc.

2. Surcharge of 10% on all non-corporate tax payers whose income exceeds Rs.1 crore

The Finance Bill, 2013 proposes to levy surcharge across the board on all

persons. In the case of individual, HUF, AOP, body of individual or every

juridical person, the surcharge shall be payable at the rate of 10% of the

tax where the total income exceeds Rs.1 crore. This surcharge shall be

levied on the total tax payable once the income has exceeded Rs.1 crore.

However, marginal relief has been provided so as to ensure that the

surcharge does not exceed the amount of the income which exceeds Rs.1

crore. Similarly co-operative society, firm, LLP, local body shall also be

required to pay surcharge at the rate of 10% of the tax in case the income

exceeds Rs.1 crore.

3. Increase in rate of surcharge from 5% to 10% on companies where

income exceeds Rs.10 crore

The Finance Bill, 2013 proposes to increase the rate of surcharge both on

domestic as well as foreign companies. Presently surcharge is payable at



the rate of 5% by a domestic company in case its income exceeds Rs.1

crore. This is proposed to be revised to 10% where the total income

exceeds Rs.10 crore.

Thus there will be no surcharge in case the total income of the company

does not exceed Rs.1 crore. Surcharge applicable shall be 5% where the

income exceeds Rs.1 crore but does not exceed Rs.10 crore. The

surcharge applicable shall be 10% where the income exceeds Rs.10 crore.

In the case of a foreign company (a company other than a domestic

company) the surcharge is being increased from 2% to 5% where the

income exceeds Rs.10 crore. The existing rate of surcharge of 2% shall

continue to apply where the income of the foreign company exceeds Rs.1

crore but does not exceed Rs.10 crore.

4. Surcharge on dividend distribution tax increased from 5% to 10%

The rate of surcharge on dividend distribution tax payable under Section

115-O and Section 115-R is proposed to be increased from 5 % to 10%.

The effective rate of dividend distribution tax (including education cess)

which is at present 16.22% shall get increased to 16.99%. This

amendment is being made from 1.4.2014 and accordingly dividend

distributed on or after 1.4.2013 shall be liable for increased surcharge.

The Finance Minister in his Budget speech has stated that the surcharge

being levied in this budget is only for one assessment year. However, past

experience shows that surcharge once levied is extended year after year.

5. Tax on Distribution of Income of Debt Mutual Fund increased from

12.5% to 25% The tax rate on distribution of income by Debt Mutual Fund (other than a

Money Market Mutual Fund or Liquid Fund) to an individual and HUF is

being increased from 12.5% to 25%. Presently under Section 115-R no

tax is payable on distribution of income of an equity oriented fund.

However, in respect of debt fund there are two classifications. For money

market mutual fund or a liquid fund, the tax rate on distribution of income

to an individual or HUF is 25% and in respect of other debt fund the tax



rate prescribed is 12.5%. Accordingly investors could park their funds in

debt mutual fund other than money market mutual fund or liquid fund

instead of putting the money in deposit with the bank, etc. so as to get the

benefit of reduced rate of tax of 12.5%. This has affected the flow of

deposits into banks. To address this anomaly, the Finance Bill, 2013 has

proposed to increase the tax rate to 25%. Accordingly the tax rate

applicable on distribution of income to an individual or HUF by all debt

mutual funds will be 25%. The tax rate on distribution of income to any

person other than an individual or HUF i.e. a firm, or a company continues

to be 30%.

This new rate will be applicable on income distributed on or after 1st June,

2013 and as such income distributed before 1st June, 2013 will be liable for

tax @ 12.5% only.

With this amendment Monthly Income Plan (MIPs) of Mutual Funds where a

large number of retired people used to invest so as to receive monthly

dividend will get seriously affected. These investors now need to move to a

Systematic Withdrawal Plan. If they do so they would have to pay long

term capital gains tax which is 20% if indexation benefits are availed and

10% if indexation benefits are not availed. Systematic Withdrawal Plan in

substance is not different from the Monthly Income Dividend Plan. In the

Monthly Income Plan one receives income earned on units by way of

dividend and in the Systematic Withdrawal Plan the value of the value of

the Units appreciates by the income earned during the month and a part of

the Units equivalent to such appreciation in the value of the units are

encashed.

6. Security Transaction Tax (STT) being reduced on future in

securities

The Finance Bill, 2013 proposes to reduce the security transaction tax rate.

There will be no STT payable on the delivery based purchases of units of an

equity oriented Fund. On delivery based sale of units of an equity oriented

Fund – STT payable has been reduced from 0.1% to 0.001%. The STT rate

on sale of futures in securities has been reduced from 0.017% to 0.01%



and on sale of a unit of equity oriented fund to the Mutual Fund the rate

has been reduced from 0.25% to 0.001%. These changes in STT rate shall

be effective only from 1st June, 2013.

7. Commodity Transaction Tax (CTT) introduced on Commodity Derivatives other than agricultural commodities

The Finance Bill, 2013 proposes to levy commodity transaction tax on

commodity derivatives at the rate of 0.01%. This tax shall be payable by

the seller at the time of sale of commodity derivatives in respect of

commodities other than agricultural commodities traded in recognized

associations (exchange). The commodity derivatives shall mean –

i. A contract for delivery of goods which is not a ready delivery

contract; or

ii. A contract for differences which derives its value from prices –

A) of such underlying goods;

B) of related services and rights, such as warehousing and

freight; or

C) with reference to weather and similar events and

activities.

having a bearing on the commodity sector.

The value of taxable commodity transaction shall be the price at which the

commodity derivative is traded. This tax is to be collected by the

recognized associations (exchange) from the seller and is to be paid within

7 days of the month following the month in which the same is collected. All

the provisions applicable regarding security transaction tax in this regard

shall be applicable. It is to be noted that this commodity transaction tax

shall be applicable only on commodity other than agricultural commodity

and shall be applicable from the date as the Central Government shall

notify in the official gazette which in any case will be after the Finance Act

2013 is notified. A corresponding amendment is being made by inserting



clause (xvi) in section 36(1) to allow deduction of the commodity

transaction tax so paid in the course of the business while computing profit

and gains of business or profession if income from such commodity

transaction is included in the income. It may also be relevant to note that

the Finance Bill 2008 had also proposed to levy commodity transaction tax

but the same was not implemented.

Levy of Commodity Transaction Tax (CTT) on non-agricultural commodities

will increase cost substantially and accordingly the investors and punters in

commodities may shift to agricultural commodities’ futures. It is

interesting to note that the Security Transaction Tax on equity futures has

been reduced from Rs.1700 per crore to Rs.1000 per crore whereas a new

CTT of Rs.1000 per crore has been levied on commodity futures. The

currency futures, of which the market is also quite big, there is no such

transaction tax at present.

B. EXEMPTIONS/DEDUCTIONS

1. One time benefit of interest of Rs.100,000 on acquiring first home

by an individual

The Finance Bill, 2013 proposes to introduce a new Section 80EE to provide

deduction in respect of the interest payable on loan taken by an individual

from a bank or a housing finance company for the purpose of acquisition of

a residential house property. This deduction is restricted to only Rs.1 Lac

and that too for one assessment year i.e. assessment year 2014-15 in

respect of the housing loan sanctioned from 1st April, 2013 to 31st March,

2014. It is to be noted that it is a one time exemption available for one

assessment year of Rs.1 Lac only. However, in case one is not able to take

full deduction of Rs.1 Lac in the assessment year 2014-15, then the

deduction of the balance amount of Rs.1 Lac can be claimed in the

subsequent assessment year i.e. 2015-16. One should not get confused

with the yearly deduction of interest of Rs.1.5 Lac which is available under

Section 24(a) in respect of self occupied property. Thus deduction in the

first year i.e. assessment year 2014-15 can be up to Rs.2.5 Lac in respect

of interest on housing loan. However, in the subsequent year despite the

interest on housing loan being more than Rs.1.5 Lac the deduction



available will be only of Rs.1.5 Lac under section 24(a) and no deduction

shall be available under this new Section 80-EE. It is to be further noted

that for claiming this new deduction of Rs 1,00,0000 the value of the

residential house property should not exceed Rs.40 Lac. Further the

assessee should not have any residential house property on the date of the

sanction of the loan. The amount of the loan sanctioned should not exceed

Rs.25 Lac. It is to be further noted that the date of sanction of loan is

sacrosanct for this deduction. The benefit is available only in respect of the

loan sanctioned between 1st April, 2013 to 31st March, 2014. Any loan

sanctioned before 1st April, 2013 will not be eligible loan. However, loan

sanctioned before 1st April, 2014 will be eligible though the house may be

acquired after 1st April, 2014. This deduction shall be available to an

individual only and not to an HUF.

2. Deduction for investment in Rajiv Gandhi Equity Saving Scheme to be for 3 years

The Finance Act, 2012 has introduced a new Section 80CCG to allow

deduction of 50% of the amount invested in equity shares to the extent of

Rs.25000. This deduction was available to a new retail investor only for

one assessment year and whose gross total income does not exceed Rs.10

Lac.

The Finance Bill, 2013 proposes to extend the benefit of this scheme from

one year to three consecutive assessment years with the result that a new

retail investor can make investment of Rs.50000 in each of the three years

and claim 50% deduction of such investment in each of the three

assessment years. Further the restriction of gross total income to not to

exceed Rs.10 Lac is being increased to Rs.12 Lac. The scope of investment

which was limited to listed equity shares is also being expanded so as to

include listed units of an equity oriented fund. Now the new retail investor

can also make the investment in the equity oriented fund of the mutual

fund and claim benefit of this scheme.

3. Scope of section 80-D in respect of Health Insurance Premium

expanded to include other schemes



As per the provision of Section 80-D a deduction of Rs.15000 is allowed in

respect of the amount paid to effect or keep in force an insurance on the

health of the assessee or his family or any contribution made to Central

Government Health Scheme (CGHS). The Finance Bill, 2013 proposes to

widen the scope so as to include such other schemes as may be notified by

the Central Government from time to time. This is being done to cover

contribution being made under other Health Schemes which are similar to

the CGHS.

4. Person with disability or disease may contribute higher percentage

of insurance premium

The Finance Bill, 2013 proposes to amend the provision of Section 10(10D)

so as to allow higher contribution up to 15% of the actual capital sum

assured under a life insurance policy to a person with disability or severe

disability or to persons suffering from disease or ailment as may be

specified in Rule 11DD. The Finance Act, 2003 has introduced a condition

under Section 10(10D) to the effect that the amount received on maturity

of an insurance policy shall be exempt only when the premium paid for

such policy does not exceed 20% of the actual capital sum assured in any

year. This condition was inserted to discourage one time life insurance

premium policies whereby to take benefit of Section 10(10D) the entire

premium was being paid in one year and later on the maturity amount with

bonus was being claimed as exempt under Section 10(10D). The Finance

Act, 2012 has further reduced this amount from 20% to 10% of the capital

sum assured in any year so as to be eligible for exemption. This Finance

Bill, 2013, considering the fact that the premium paid in respect of persons

who suffers from severe disability or disease or ailment is higher has

proposed to relax this condition so as to allow contribution up to 15% of

the capital sum assured in any one year. It may be noted that this

increase in ceiling from 10% to 15% of the capital sum assured shall be

applicable only for the policies issued on or after the 1st day of April, 2013.

Corresponding amendment has been proposed in section 80-C to allow

deduction in the case of a person with disability or suffering from disease or

ailment as is not in excess of 15% of the actual capital sum assured.



5. Donation to political parties not to be exempt when paid in cash

Presently under Section 80-GGB of the Income Tax Act, deduction is

allowed to an Indian company in respect of the sum contributed to any

political party, while computing its total income. Similarly under Section

80-GGC deduction is allowed to an individual, HUF, partnership firm, LLP in

respect of contribution to any political party.

The Finance Bill, 2013 proposes to insert a condition that no deduction

under these sections shall be allowed in respect of any sum contributed by

way of cash. Thus the contribution to political parties has to be by way of

cheque or draft. It is interesting to note that the restriction is with

reference to payment in cash as against provisions of section 40A(3),

section 269SS and section 269T where there is a requirement not to make

any payment otherwise than by way of an account payee cheque or an

account payee draft.

6. Special provision regarding taxation of Securitization Trust

The Finance Bill, 2013 proposes to give a special status to the trust formed

to undertake securitization activities which are regulated by SEBI or RBI.

The income of such trust shall be exempt under section 10(23DA) of the

Income Tax Act. However, such trust will be liable to pay additional income

tax on the income distributed to its investors on the line of dividend

distribution tax. The tax rate shall be 25% in the case of distribution being

made to the individual and HUF and 30% in other cases. These rates are

the same as proposed under section 115-R in respect of debt mutual fund.

The distributed income received by the investor will be exempt from tax.

This provision shall be effective from 1st June, 2013.

7. Deduction under section 80JJAA for additional wages for workmen employed for manufacture of goods in factory as against industrial

undertaking

The existing provisions of Section 80JJAA which provides deduction of an

amount equal to 30% of additional wages paid to the new regular workmen

employed by the assessee for three years is being substituted so as to

restrict the Indian company deriving profit from manufacture of goods in its



factory as against existing provision which allows deduction to any

industrial undertaking engaged in the manufacture or production of an

article or thing. Thus the deduction is being limited to a factory as against

industrial undertaking at present. This amendment has been proposed on

the ground that the incentive under this provision was intended for

employment of blue collar employees in the manufacturing sector and not

for other employees in other sectors.

C. BUSINESS INCOME

1. Investment Allowance of 15% on investment of more than Rs.100 crore in Plant and Machinery

The Finance Bill, 2013 proposes to allow a deduction of 15% as investment

allowance on the aggregate amount of the actual cost of the new plant and

machinery acquired and installed during the period beginning 1st April, 2013

and ending on 31st March, 2015 under a new Section 32AC. This benefit

shall be available to a company only which is engaged in the business of

manufacture of an article or thing and which invests more than Rs.100

crore in the new plant and machinery. As per the proposed amendment if

a company, in the assessment year 2014-15 i.e. during the period from 1st

April, 2013 to 31st March, 2014, invests more than Rs.100 crore in the

plant and machinery, it can claim the benefit of 15% investment allowance

in assessment year 2014-15. Such company if further invests in plant and

machinery in the assessment year 2015-16 i.e. during the period from 1st

April, 2014 to 31st March, 2015, it can claim the 15% investment allowance

in respect of the further additions it has made during the financial year

2014-15 in assessment year 2015-16. In case the company has invested

less than Rs.100 crore in the financial year 2013-14, it shall not be eligible

to claim investment allowance in assessment year 2014-15. However, in

case in the financial year 2014-15, it makes further investment so that the

total investment including the investment made in the financial year 2013-

14 is more than Rs.100 crore, then it shall be entitled to claim investment

allowance of 15% on the total investment in plant and machinery including

that of the financial year 2013-14. It is to be noted that this benefit is

available only to a company and not to an individual, HUF, partnership firm,

LLP, etc. Further this benefit shall be available only when the company is



engaged in the business of manufacture of an article or thing. Hence

service industry, traders are outside this ambit. Power companies will also

have a dispute on the issue whether power is an article or a thing and

accordingly whether it can be said that power companies are engaged in

the business of manufacture of an article or a thing. The minimum amount

of investment of Rs.100 crore to claim this benefit is too high and only a

few large companies will be in a position to claim this benefit. Further the

investment allowance will not reduce the book profit and as such the

liability to pay Minimum Alternate Tax will still be there.

The Finance Minister in his Budget speech has stated that no large

economy can be truly developed without a robust manufacturing sector.

Accordingly this proposal is being introduced to attract new investment and

to quicken the implementation of projects. He has also hoped that there

will be enormous spill over benefits to small and medium enterprises.

The objective, as stated by the Finance Minister, is to promote the

manufacturing sector which has lagged behind as is evident from the

figures of the GDP of manufacturing sector. Accordingly it will be ideal that

this minimum requirement of Rs.100 crore is reduced, if not less, to Rs.10

crore so that a large number of enterprises become eligible. Further there

is no need to restrict the benefit to corporate entities only.

There is a further condition attached that the new plant and machinery so

acquired and installed shall not be sold or transferred otherwise than on

amalgamation or demerger for a period of five years and in case of such

transfer the amount of deduction allowed in respect of such plant and

machinery shall be deemed to be the income of the year in which such sale

or transfer is effected. The condition of not transferring the new plant and

machinery of more than Rs.100 crore for a period of five years is too

impractical. If plant and machinery of more than Rs.100 crore is installed

or acquired there is bound to be some replacement over a period of five

years of some of the machinery. Accordingly it may not be advisable to put

a condition to not to transfer even a small part of the plant and machinery.

A leverage to transfer or replace 10% to 25% of the total cost of plant and

machinery may be provided so as to avoid practical difficulties on this



aspect. Further the period of five years is too long given the fact that these

days technology changes very fast and plant and machinery get outdated

and becomes obsolete within a short span. Ideally this period should not

be more than three years.

Further to give a boost to the manufacturing sector, it will be better that

the depreciation rate for plant and machinery, which were reduced in the

year 2005 from 33.33% to 15%, be again increased to 33.33% across the

board for all plant and machinery used in manufacture or production of an

article or thing. This will really encourage more investment in the plant

and machinery and will not also effect the revenue as depreciation over a

period cannot exceed the actual cost.

2. Sale of property held as stock in trade to be valued at Circle rate for business income also

The Finance Bill, 2013 proposes to introduce a new Section 43CA on the

line of Section 50C so as to compute income of the person engaged in the

business of real estate in respect of the property sold on the basis of the

value adopted for the payment of the stamp duty based on the circle rate

notified by the State Government. The Finance Act, 2002 has introduced

Section 50C to provide that in case of transfer of land or building or both, if

the consideration received is less than the value adopted or assessed by

any State Government for the purpose of levy of stamp duty, the value

adopted for stamp duty shall be deemed to be the full value of the

consideration received for computing capital gain under Section 48 of the

Income Tax Act. This provision was limited to computing capital gain under

section 45 of the Income Tax Act and was not applicable where the land

and building was being sold in business like builder, developer. The Finance

Bill, 2013 now is expanding the scope and accordingly in the case of a

builder or a developer also if the sale consideration stated is less than the

value adopted for the purpose of payment of stamp duty, then the value so

adopted will be taken as full value of consideration while computing

business income.

As is the case under Section 50C, an option is being given to the assessee

that in case he claims that the value adopted for the purpose of stamp duty



exceeds the fair market value as on the date of transfer of the property,

the Assessing Officer may refer the valuation of the property to the

valuation officer. If the fair market value determined by the valuation

officer is less than the value adopted for stamp duty purposes, the

Assessing Officer may take such fair market value to be the full value of the

consideration received. However, if the fair market value determined by

the valuation officer is more than the value adopted for stamp duty

purposes, the Assessing Officer shall not adopt the fair market value

determined by the valuation officer but will take the value adopted for

stamp duty purposes as the consideration. Thus in case the property is

referred for valuation, the Assessing Officer cannot increase the value but if

the valuation is less than the stamp duty value the same will get reduced.

Further in order to address the issue of change in circle rate consequent to

the time gap between the date when the agreement to sell is entered into

and the date when the registration is effected it has been provided that the

value to be adopted for the purpose of computing profit and gains of

business or profession shall be the stamp duty value on the date of the

agreement to sell. However, in order to avoid any manipulation it has been

provided that this benefit of agreement to sell shall be available only when

the consideration or part of the consideration has been received by any

mode other than cash on or before the date of the agreement for transfer

of the property. Thus the agreement to sell where consideration has been

received in cash only will not be valid for determination of the date

applicable for circle rate.

It is to be noted that under this section 43CA, in the case of a person

selling immovable property as stock-in-trade the circle rate applicable as on

the date of agreement to sell will be applicable. However, for a person

selling immovable property as a capital asset, the capital gain would be

computed on the basis of the circle rate applicable on the date of

registration, not on the date of entering into agreement to sell. No

corresponding amendment has been proposed to this effect in existing

section 50C. While selling property as a capital asset also there is every

possibility that the circle rate may get changed between the times when



the agreement to sell is entered with the prospective buyer and the date

when the property is registered in the name of the buyer. Thus there is a

need to add corresponding provision under Section 50C also.

3. Clarificatory amendment regarding provision for bad debt in case of banks

The Finance Bill, 2013 proposes to introduce a clarificatory amendment

regarding bad debts written off and the provision for bad debts. Presently

under section 36(1)(vii) deduction is allowed in respect of bad debts

actually written off. Further under section 36(1)(viia) deduction is allowed

to the banks in respect of provision for bad and doubtful debts which

include rural advances and other advances. As per section 36(2)(v) it has

been provided that actual bad debts allowable under section 36(1)(vii) first

needs to be debited to the provision made under section 36(1)(viia) and

any amount of the actual debt over and above the provision under section

36(1)(viia) shall only be eligible for deduction. However, considering some

judicial interpretations whereby it has been held that the actual bad debt is

to be debited to the provisions which is limited to rural advances and not

the total provision for bad debts this amendment is being made.

Accordingly while claiming any deduction under section 36(1)(vii) first the

amount available in the provision under section 36(1)(viia) needs to be

adjusted and any bad debt actually written off in excess thereof shall only

be eligible for deduction under section 36(1)(vii).

4. License Fee, Royalty, etc. levied by State Government on State

Government Undertakings not eligible for deduction The Finance Bill, 2013 proposes to make a very interesting amendment by

inserting a new clause (iia) under Section 40(a) to provide that any amount

paid by way of royalty, license fee, services fee, privilege fee, service

charge or any other charge by whatever name called, levied exclusively on

or which is appropriated directly or indirectly from a State Undertaking by

the State Government will not be eligible expenditure while computing its

income. The memorandum explaining the provisions in the Finance Bill,

2013 states that this is being done to protect the tax base since disputes



have arisen about deductibility of such expenditure while computing income

of such undertakings.

It has also been stated that the undertakings are separate legal entities

than the State and as such are liable to income tax. This amendment

shows the difference in the thought process of the Central Government and

the State Governments and also ignores the fact that these State

Government undertakings have been created to carry out the State

responsibility in a more professional and efficient manner. The scope and

the area of these undertakings by and large is the State function. The

State Government in order to have a better administration has created

these undertakings and has provided them with statutory functions and

also the State assets by way of land and other infrastructure. The income

arising to these undertakings cannot be considered to be business income

in the sense on which tax can be levied. Accordingly the denial of the

deduction in respect of an amount which is statutorily required to be paid

may not be justified. The State Government having delegated a sovereign

function to these undertakings for better management and recovering a fee

or royalty for the function delegated to such undertakings are entitled to

the same and should not be assumed to be a tax avoidance device.

5. Further extension for setting up power generation, transfer or distribution undertaking by one year

The power industry continues to get extension year after year. The Finance

Bill, 2013, on the line of the Finance Act, 2012, proposes to extend the

terminal date by another one year for claiming exemption under Section

80-IA(4) in respect of undertakings engaged in generation and distribution

of power; or which starts transmission or distribution; or which undertakes

substantial renovation and modernization of existing network of

transmission or distribution upto 31st March, 2014. Accordingly all such

undertakings which become operational by 31st March, 2014 will be eligible

to claim exemption for 10 consecutive assessment years out of the 15

assessment years from the year of its operation.

6. Dividend distribution tax of 20 per cent on buy back of share of unlisted companies



The Finance Bill, 2013 proposes to introduce a new section 115-QA to levy

dividend distribution tax on an Indian company on buy back of its shares

not listed in any recognized stock exchange. The tax payable shall be at

the rate of 20% on the distributed income i.e. the consideration paid by the

company on buy back of shares as reduced by the amount which was

received by the company for issue of such shares. Corresponding

amendment is being made in Section 10 by inserting clause (34A) to

exempt income arising to a shareholder of buy back of shares of unlisted

companies on which distribution tax has been paid under the above section

115-QA. This amendment is being proposed considering the fact that the

consideration received by a shareholder on buy back of shares by the

company at present is taxable as capital gain under section 46A of the Act.

In view of this, many companies instead of paying dividend on which

dividend distribution tax is payable, buyback the shares and the

shareholder in turn either claim exemption of the capital gain under

various provisions of the Income Tax Act or such capital gain is taxed at a

lower rate. To address this issue it has been proposed that company on

such buyback of shares shall pay distribution tax. It is to be noted that this

tax is payable on the difference between the consideration paid by the

company for buy back of shares and the amount received by the company

for issue of such shares irrespective of the fact whether the company has

accumulated profit or not or the amount of accumulated profit. Thus this

proposed provision goes even beyond section 2(22)(e) of the Act whereby

amount advanced is considered to be deemed dividend only to the extent

of accumulated profit.

This amendment shall be effective from 1st June, 2013 and accordingly any

buy back of unlisted shares by such companies, before 1st June, 2013 shall

not be liable for this new additional income tax.

7. Key Man Insurance Policy

The Finance Bill, 2013 proposes to plug another loophole in respect of key

man insurance policies so as to provide that the benefit of exemption under

Section 10(10D) shall also not be available in respect of a Key Man

insurance policy which has been assigned to any person during its term



with or without consideration and such policies shall continue to be treated

as a key man insurance policy. This amendment is being made considering

the fact that key man insurance policy is assigned before its maturity to the

key man and it is claimed that after such assignment the policy is no

longer a key man insurance policy and accordingly not excluded from the

exemption provided under section 10(10D).

8. Trading in Commodity Derivatives not to be speculated

The Finance Minister, while proposing to levy CTT on non-agricultural

commodities futures contract have also proposed that trading in commodity

derivatives will not be considered as a speculative transaction. However,

no corresponding amendment has been proposed in Section 43(5) by the

Finance Bill, 2013. It appears that while debating the issue later to levy

CTT, it was thought fit to give a concession by treating trading in

commodity derivatives as non- speculative transactions. Accordingly

suitable amendment will be proposed in Section 43(5) at the time of

passage of the Finance Bill so as also to exclude eligible transactions in

respect of trading in commodity derivatives on the line on which trading in

derivatives or securities have been excluded. It is to be further noted that

though the CTT will be levied on non-agricultural commodity derivatives,

the benefit of not treating the transaction in commodity derivatives as

speculative by implementation will get extended to trading in agricultural

commodity derivatives also. It is to be further noted that this benefit of

treating the commodity derivatives as non-speculative will be effective from

the date the same is notified by the Central Government. Losses, if any,

before such notification in such commodity derivatives will be considered to

be speculative losses and as such will not be eligible to be set off against

the profit arising from such transactions after the notification date.

D. CAPITAL GAIN

1. Agricultural land outside municipal limit for the purpose of capital

gain and agricultural income re-defined

At present, under the Income Tax Act, capital gain arising on transfer of

agricultural land in India is not taxable as it does not fall in the definition of



the capital asset under Section 2(14)(iii) of the Income Tax Act. Similarly

any rent or revenue derived from agricultural land (farm house) which is

situated in India is considered to be agricultural income and not taxed in

view of the provisions of Section 2(1A) of the Income Tax Act. For the

purpose of claiming this exemption, as on date, in both these sections it

has been provided that such agricultural land should not be situated in any

area within the jurisdiction of the municipality or a cantonment board and

which has a population of not less than ten thousand or in an area which is

not more than 8 KMs from the local limit of any municipality or a

cantonment board as may be notified by the Central Government having

regard to the extent of urbanization of that area. Thus for claiming

exemption under this provision, as on date, the land must fall outside the

area notified by the Central Government. The Finance Bill 2013 proposes

to define the area in the Act itself rather than making a reference to the

notification. Accordingly it has been proposed that the said land should not

be situated in the case of a municipality or a cantonment board which has a

population of more than 10000 but not exceeding one lac within a distance

of 2 KMs. In the case where the population of the municipality or a

cantonment board is more than one lac but not exceeding ten lac such land

should not be situated within a distance of 6 KMs. In the case of a

municipality or a cantonment board which has a population of more than

ten lac such land should not be situated within a distance of 8 KMs. All

distances have to be measured from the local (outer) limit of the

municipality or a cantonment board and are to be measured aerially. It has

also been clarified that the population shall mean the population according

to the last preceding census of which the relevant figures have been

published before the 1st day of the previous year i.e. the taxable year, not

the assessment year. This provision shall come into force from assessment

year 2014-15 for which the previous year will start from 1st April, 2013.

Accordingly the persons having land which are covered within the meaning

of agricultural land under the existing provisions and may not be covered

within the meaning of agricultural land under the proposed amendment, if

they sell the said agricultural land by 31st March, 2013 they can still claim

exemption.



E. INCOME FROM OTHER SOURCES 1. Property purchased for inadequate consideration to be taxed as

income from other sources

The Finance Bill, 2013 proposes to reintroduce an amendment by

substituting existing clause (vii)(b) of Section 56(2) with a new clause so as

to tax the difference in the stamp duty value of the property purchased and

the actual consideration paid, if such difference exceed Rs.50000, as

income from other sources of the buyer being individual or HUF. It is to be

noted that a similar provision was introduced by the Finance (No.2) Act,

2009 effective from 1st October, 2009. However this provision was

withdrawn retrospectively by the Finance Act, 2010. Under section 50C, the

seller is already required to compute capital gain on the basis of stamp

duty value if the actual consideration is less than stamp duty value. As is

the case under Section 50C for the seller, the buyer in case he disputes

that the stamp duty valuation is higher than the fair market value on the

date of the transfer, the Assessing Officer may refer the matter to the

valuation officer. If the fair market value determined by the valuation

officer is less than the value adopted for stamp duty purposes then such

fair market value shall be adopted for this purpose. However, if the fair

market value determined by the valuation officer is more than the stamp

duty value then the Assessing Officer shall not be able to adopt such fair

market value and will take the stamp duty value for this purpose in view of

the provisions of Section 50C(3) which are applicable to this proposed

section also. This amendment by implication may address all those

disputes which are recently arising on acquisition of immovable property

where by the Assessing Officer makes addition merely on the basis of the

higher valuation made by the valuation officer without there being any

material or evidence of any consideration being paid over and above the

value stated in the sale deed.

The proposed amendment shall also address the issue which may arise

consequent to the revision of the circle rate between the date on which the

agreement to sell is entered and the date on which the sale deed is

entered. It is being provided that in such a case the stamp duty value on

the date of the agreement to sell shall be taken provided the consideration



or a part thereof has been paid on or before the date of the agreement by a

mode other than cash. This condition of payment at the time of the

agreement to sell other than by cash is being introduced to avoid any doubt

about the date of the agreement to sell. It is to be noted that this

amendment does not make a distinction of acquisition of property for

personal purposes or in the course of business. Accordingly it can have far

reaching implications in respect of persons engaged in the business of real

estate if the purchases have been made at a value less than the stamp

duty value. However, it is also to be noted that this provision is applicable

only in the case of an individual and HUF and accordingly this provision will

not be applicable where the property is purchased by a partnership firm or

an LLP or a company.

F. ASSESSMENT 1. Return to be defective if tax with interest is not paid before filing of

return

The Finance Bill, 2013 proposes to insert a new clause (aa) in explanation

below section 139(9) so as to provide that if tax together with interest

payable in accordance with the provisions of section 140A has not been

paid on or before the date of furnishing of the return, the same will be

treated as a defective return.

As per the provisions of section 139(9) the Assessing Officer in such a

situation will intimate the defect to the assessee and give him an

opportunity to rectify the defect within a period of 15 days from the date of

such intimation or within such further period on an application the

Assessing Officer may in his discretion allow. In case the defect is not so

rectified within the period so allowed, the return shall be treated as invalid

return and it shall be considered that assessee has failed to furnish the

return. However, the proviso to this section also states that where

assessee rectifies the defect after the expiry of the period allowed to him

but before the assessment is made, the assessing officer can condone the

delay and treat the return as a valid return.

With this amendment it will not be possible to file return without paying full

taxes with interest.



This provision shall be applicable from 1st June, 2013.

2. Scope of directing special audit under section 142(2A) being

widened

At present under section 142(2A) of the Income Tax Act, the Assessing

Officer can direct the assessee to get the accounts audited if he is of the

opinion having regard to the nature and complexity of the accounts and the

interest of the revenue, it is necessary so to do. The Finance Bill, 2013,

proposes to widen the ambit so as to provide that the assessing officer can

direct special audit not only having regard to the nature and complexity of

the accounts but also having regard to the volume of the accounts, doubts

about the correctness of the accounts, multiplicity of transactions in the

accounts or specialized nature of business activity of the assessee.

This amendment shall be applicable from 1st June, 2013.

3. Extension of period of limitation where reference for exchange of

information is made abroad or where order of special audit is

quashed by the court.

The Finance Bill, 2013 proposes to clarify the existing provision in section

153 regarding extension of time period for completion of assessment in

case where reference for exchange of information is made abroad by a

competent authority under Double Taxation Avoidance Agreement referred

to in Section 90 or under Section 90A. It is being clarified that where more

than one reference for exchange of information is made the period to be

excluded shall be the period from the date on which a reference or first of

the references for exchange of information is made to the date on which

the information requested is last received by the Commissioner or a period

one year whichever is less while computing the period of limitation under

section 153 of the Income Tax Act. Thus the maximum extension in case

of exchange of information is limited to a period of one year.

Further it is being proposed that the period of limitation for completion of

assessment and reassessment shall stand extended in case the direction of

the assessing officer for special audit under section 142(2A) is set asided

by the Court. The extension shall be for the period commencing from the



date on which the assessing officer directs the assessee for special audit

and ending with a date on which orders setting aside such direction is

received by the Commissioner while computing the period of limitation for

the purpose of Section 153. A corresponding amendment has been

proposed in section 153B of the Income Tax Act regarding reassessment

consequent to the search.

This amendment shall be effective from 1st June, 2013.

4. Tax due to include interest and penalty for recovery from directors and partners of LLP

Provisions of section 179 whereby tax due from a private company can be

recovered from the director is being amended to clarify that the tax due

shall also include interest and penalty thereon as well as any other sum

payable under the Act. Similar amendment is being made under section

167C of the Income Tax Act for recovery of tax from partners in respect of

liability of LLP.


5. Existing liability under section 132B not to include advance tax payable

A clarificatory amendment is proposed to be introduced by inserting

Explanation 2 in section 132B to clarify that existing liability stated in

section 132B does not include advance tax payable in accordance with the

provisions of Chapter XVIIC. This is being done to ensure the recovery of

not only outstanding tax, interest and penalty but also to provide for

recovery of taxes/interest/penalty which may arise subsequent to the

assessment pursuant to search.


6. Penalty for non-furnishing of AIR information on requisition by the

assessing officer increased from Rs.100 to Rs.500 per day

Presently under section 285BA there is an obligation to furnish annual

information return in respect of certain transactions stated therein. Further

in terms of section 285-BA(5), the income tax authority has power to call

for such information where a person has not furnished the AIR information.



In case of failure to furnish the information, presently penalty at the rate of

Rs.100 per day is leviable under section 271FA. The Finance Bill, 2013

proposes to raise the penalty, in cases where the income tax authority has

called for the information under sub-section (5) of section 285BA and the

same is not furnished, from Rs.100 per day to Rs.500 per day.

7. Electronic filing of annexure-less Wealth Tax Return:

Provisions of Wealth Tax Act are being amended to facilitate electronic filing

of annexure-less return of net wealth. The amendment proposed is on the

line similar to the amendment made earlier to facilitate electronic filing in

Income Tax Act under Section 139C and 139D.

This amendment is being made with effect from 1st June, 2013, and

accordingly return of wealth tax for assessment year 2013-14 now can be

filed electronically.

G. TAX DEDUCTION AT SOURCE

1. Tax to be deducted at source by buyer on purchase of immovable

properties

The Finance Bill, 2013 proposes to reintroduce provision making it

obligatory to deduct tax at source under a new Section 194-IA so as to

provide that every buyer at the time of making payment or crediting of any

sum as consideration for transfer of immovable property other than

agricultural land shall deduct tax at source at the rate of 1% of such sum

where the total amount of the consideration for the transfer of the

immovable property is Rs.50 Lac or more. This provision is being

introduced on the reasoning that despite there being a statutory

requirement of furnishing Permanent Account Number in the documents

relating to the sale of the property, in majority of the cases, such PAN is

not being furnished. A similar provision was introduced by the Finance Bill,

2012 whereby an obligation was also cast on the registering officer to not

to register any document unless the buyer furnishes the proof of deduction

of income tax. However, in the new provision introduced in this Finance

Bill, 2013 there is no such obligation on the registering officer. Under the

proposed provision there is an obligation on every buyer irrespective of the



status i.e. individual, HUF, partnership firm, company, to deduct tax at

source at the rate of 1%. This deduction has to be made at the time of

making payment or credit whichever is earlier. Thus even at the time of

giving earnest money or an advance money or an installment, tax will be

required to be deducted and deposited in accordance with the provisions of

the Act. Further it will be also important that the seller has a Permanent

Account Number as otherwise in view of the provisions of Section 206AA of

the Act the tax will be required to be deducted at the rate of 20% instead

of 1%. The only exclusion is where the consideration is less than Rs.50 Lac

or agricultural land as defined under Section 2(14)(iii) the definition of

which is also proposed to be changed in this Finance Bill, 2013.

This provision may have a lot of practical difficulties in view of the fact that,

this will be applicable to an individual buying property but may not be

having TAN. Further tax need to be deducted from each payment. In the

case of a developer, each customer will be deducting tax and it will be a

very voluminous task to collect tax certificates. Further the issue of

reconciliation will also be cumbersome considering the fact that the tax will

get deducted even on advance payment and income consequent to the sale

may accrue in subsequent year or years..

This provision will be applicable from 1st June, 2013 and accordingly all

transactions on or after 1st June, 2013, where the consideration is not less

than Rs.50 Lac, shall be covered under this provision.

H. INTERNATIONAL TAXATION

1. Tax Residency Certificate necessary but not sufficient – GAAR being

revived from back door

The Finance Bill, 2013 proposes to insert a new sub-section (5) in section

90 and section 90A to the effect that for claiming any relief under the

Double Taxation Avoidance Agreement, the tax residency certificate as

referred to in sub-section (4) of section 90 and 90A shall be necessary but

not a sufficient condition. It has been stated that in the memorandum

explaining the provisions in the Finance Bill 2013, that this position that tax

residency certificate is necessary but not sufficient condition was earlier



mentioned in the memorandum explaining the provisions in the Finance

Bill, 2012 while inserting sub-section (4) regarding the requirement of the

tax residency certificate.

This amendment, however, has a far reaching implication as the Mauritius

tax route will again come under threat because of this provision. This

amendment will also dilute the most quoted circular No. 789 dt. 13th April,

2000 of Central Board of Direct Taxes which was quashed by the Delhi High

Court but in an appeal filed by the Union of India, the Supreme Court

upheld the validity of the circular in the famous case of Azadi Bachao

Andolan 263 ITR 706 (SC). With this proposed amendment the tax officer

will now be able to raise the same dispute which was raised in the year

2000. The officer may ask a Foreign Institutional Investor (FII), besides

submitting tax residency certificate, to establish that it has actual residence

in Mauritius. It is to be noted that the whole controversy of GAAR has

arisen mainly because GAAR was intended to challenge the issue of

residency and consequently withdraw the benefit available under the

Mauritius Treaty. Despite India having tax treaties with 84 countries, the

most important treaties are that of Mauritius and Singapore as it affects the

major foreign investment inflow in India since capital gains realized by the

residents of these jurisdictions are exempt under this treaty. The proposed

amendment in fact is a back door entry of the controversial GAAR provision

which otherwise, in view of the hue and cry and serious outflow of FII

investment during the year, are proposed in this Finance Bill, 2013 to be

postponed by another two years. This amendment will also water down the

Supreme Court judgment in the case of Azadi Bachao Andolan and CBDT

Circular No.789 dt. 13th April, 2000 by which it has been clarified as under:-

“The provisions of the Indo-Mauritius DTAC of 1983 apply to

'residents' of both India and Mauritius . Article 4 of the DTAC defines a resident of one State to mean any person who, under the laws of

that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar

nature. Foreign Institutional Investors and other investment funds etc. which are operating from Mauritius are invariably incorporated in that country. These entities are 'liable to tax' under the Mauritius Tax

law and are therefore to be considered as residents of Mauritius in accordance with the DTAC.



Prior to 1st June, 1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible

at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5%

or 15% depending upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A etc. Doubts have

been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a

Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC

accordingly.

The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs etc., which are resident in Mauritius would not be taxable in India on

income from capital gains arising in India on sale of shares as per

paragraph 4 of article 13.”

It may be interesting to note that in this Finance Bill, 2013, this

amendment is the only amendment which is being proposed

retrospectively i.e. from assessment year 2013-14.

2. General Anti Avoidance Rules (GAAR) –being postponed by 2 years

The Finance Bill, 2013 proposes to postpone the GAAR by another 2 years

and to substitute the existing provision of Chapter XA and section 144BA

regarding General Anti Avoidance Rules (GAAR). The amended provisions

are on the line of the expert committee’s recommendations, of which the

announcement was made on 14th January, 2013. The salient features of

this amendment are as under:-

“(A) The provisions of Chapter X-A and section 144BA will come into force

with effect from April 1, 2016 as against the current date of April 1, 2014. The provisions shall apply from the assessment year 2016-17

instead of assessment year 2014-15.

(B) An arrangement, the main purpose of which is to obtain a tax benefit, would be considered as an impermissible avoidance arrangement. The current provision of section 96 providing that it

should be “the main purpose or one of the main purposes” has been

proposed to be amended accordingly.



(C) The factors like, period or time for which the arrangement had existed; the fact of payment of taxes by the assessee; and the fact

that an exit route was provided by the arrangement, would be relevant but not sufficient to determine whether the arrangement is

an impermissible avoidance arrangement. The current provisions of section 97 which provided that these factors would not be relevant has been proposed to be amended accordingly.

(D) An arrangement shall also be deemed to be lacking commercial

substance, if it does not have a significant effect upon the business risks, or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained but

for the application of Chapter X-A. The current provisions as contained in section 97 are proposed to be amended to provide that

an arrangement shall also be deemed to lack commercial substance if the condition provided above is satisfied.

(E) The Approving Panel shall consist of a Chairperson who is or has been a Judge of a High Court; one Member of the Indian Revenue

Service not below the rank of Chief Commissioner of Income-tax; and one Member who shall be an academic or scholar having special

knowledge of matters such as direct taxes, business accounts and international trade practices. The current provision of section 144BA ,that the Approving Panel shall consist of not less than three

members being income-tax authorities and an officer of the Indian Legal Service has been proposed to be amended accordingly.

(F) The directions issued by the Approving Panel shall be binding on the

assessee as well as the income-tax authorities and no appeal against

such directions can be made under the provisions of the Act. The current provisions of section 144BA providing that the direction of

the Approving Panel will be binding only on the Assessing Officer have been proposed to be amended accordingly.

(G) The Central Government may constitute one or more Approving Panels as may be necessary and the term of the Approving Panel

shall be ordinarily for one year and may be extended from time to time up to a period of three years. The provisions of section 144BA have been proposed to be amended accordingly.

(H) The two separate definitions in the current provisions of section 102,

namely, “associated person” and “connected person” will be combined

and there will be only one inclusive provision defining a ‘connected

person’. The provisions of section 102 have been proposed to be

amended accordingly.

This amendment will be effective from 1st April, 2016 and

accordingly shall be applicable from assessment year 2016-17.



It is to be noted that the Finance Minister in his Budget speech has

stated that the recommendation of the Shome Committee have been

accepted but following major recommendations of the Shome

Committee have not been incorporated in the amendment proposed

in the Finance Bill, 2013:-

i) The monetary threshold limit of Rs.3 crore for invoking GAAR;

ii) Grand-fathering provision in respect of investment made on or

before 30th August, 2010;

iii) The applicability of the GAAR where a part of the arrangement

is an impermissible avoidance agreement to be restricted to

that part only and not to the whole arrangement;

iv) The provisions of GAAR to ensure that same income is not

taxed twice in the hands of the same tax payer in the same

year or in different assessment years.

3. Dividend received from foreign companies to continue to be taxed

at concessional rate of 15% for one more year

The Finance Bill, 2013 proposes to extend the benefit of Section 115BBD by

another one year the concessional rate of tax of 15% on the dividend

income received by an Indian company from a foreign company in which it

has shareholding of 26% or more. This provision was introduced by the

Finance Act, 2011 to attract more repatriation of income earned by a

subsidiary of Indian companies for a period of one year. The Finance Act,

2012 has extended the period to another one year. With this further

extension by the Finance Bill, 2013 this benefit will continue to be available

for dividend received in the financial year 2013-14 i.e. assessment year

2014-15.

4. Dividend received by Indian company from foreign subsidiary to be exempt from dividend distribution tax

Presently under the Income Tax provisions every Indian company in

addition to paying tax at the rate of 30% on its income is required to pay

dividend distribution tax at the rate of 15% on the amount of dividend

distributed, at the time of distribution of dividend. However, there is an

exemption in respect of the dividend distributed to the extent of the



dividend received from an Indian subsidiary company which has paid the

dividend distribution tax on such dividend. Similar exemption is proposed

to be extended by this Finance Bill, 2013 in respect of the dividend received

from a foreign subsidiary company on which tax has been paid under

Section 115-BBD of the Income Tax Act. This amendment is being

introduced to remove the cascading effect in respect of the dividend

received by an Indian company from a similarly placed foreign company.

This exemption can be subject matter of tax planning so as to take benefit

of tax at the rate of 15% as against normal tax of 30%. Presently if a

resident individual receives an income from abroad say UAE, the same will

get taxed at the rate of 30%. But if this income is received by an Indian

company by way of dividend from its subsidiary in UAE, then such dividend

income will get taxed at the rate of 15%. The Indian company in turn can

pay dividend to its individual shareholders out of such dividend received

without paying dividend distribution tax in view of the proposed

amendment. Thus the income from UAE will reach in the hands of the

individuals by paying tax at the rate of 15% as against normal tax rate of

30%.

It is to be noted that the existing provisions and the proposed amendment

allows deduction only in respect of the dividend received from a subsidiary

company on which dividend distribution tax has been paid. The dividend

received from a company which is not a subsidiary company continues to

bear the cascading effect as the company is required again to pay dividend

distribution tax on the income distributed despite the fact that such income

comprised of the dividend received from another company on which

dividend distribution tax has been paid. It is being realized that subjecting

again dividend distribution tax has a cascading effect there is no reason

why there should be a distinction of the dividend received from a subsidiary

company or a non-subsidiary company. Further the contention that only

such company shall be considered as a subsidiary company if such other

company holds more than 50% of the equity share capital of the company

also is not in line with the exemption provided under Section 115BBD in

respect of dividend received from a foreign company whereby holding 26%

or more equity is considered to be eligible for concessional rate of 15% tax.



This amendment shall be effective from 1st June, 2013 and accordingly if

any Indian company distributes dividend on or after 1st June, 2013 it shall

be eligible to deduct the amount of the dividend received by it from a

foreign subsidiary company while computing its liability of paying dividend

distribution tax.

5. Tax on Royalty or Fee for Technical Services increased to 25%

Presently under Section 115-A of the Income Tax Act, the tax rate

applicable in the case of a non-resident on income by way of royalty or fee

for technical services is 10% if the agreement for such royalty or fee for

technical services is entered on or after 1st June, 2005. The Finance Bill,

2013 proposes to increase this from 10% to 25%. This is being done on

the ground that as per the Double Taxation Avoidance Agreement (DTAA)

entered into by India with other countries, the tax rate provided in these

DTAA is more than the tax rate of 10% under this normal provision of the

Act. Accordingly there is no justification to keep the tax rate under the

normal tax provision lower than the tax rate applicable as per the Treaty.

However, this justification for enhancement of tax rate does not take into

account the fact that India has reduced the tax rate on royalty and fee for

technical services from 30% to 20% in the year 1997 and from 20% to

10% in the year 2005 to attract more investment and technology despite

the fact that the tax rate applicable on royalty or fee for technical services

under DTAA at that time were also more than the 10%. It is not that post

1997 or post-2005, the tax rates under DTAA on royalty or fee for technical

services has been increased necessitating increase in the normal provision

of the Income Tax Act.

6. Concessional rate of 5% on interest on ECB borrowing being

extended to Rupee denominated Long Term Infrastructure Bond:

The Finance Bill, 2013 proposes to extend the scope of section 194-LC in

respect of a borrowing by an Indian company in foreign currency from a

source outside India by issue of Long Term Infrastructure Bond whereby

concessional rate of tax of 5% is applicable on the interest payment to a

non-resident person. As per the proposal the concessional rate of 5% shall

be applicable in respect of the Long Term Infrastructure Bonds issued by an



Indian company which are denominated in Rupee. However, for claiming

this concessional rate of 5%, the non-resident is required to deposit foreign

currency in designated bank account and such money converted into Rupee

is utilized for subscribing to the Long Term Infrastructure Bond issue of an

Indian company. The interest income arising thereon shall be taxable at

the rate of 5%.

This provision shall be applicable from 1st June, 2013.

7. No clarity on retrospective amendment relating to Indirect Transfer

Last year, the Finance Act, 2012 has made far reaching retrospective

amendment to Section 2 and Section 9 in relation to indirect transfers to

undo the judgment of the Supreme Court in the case of Vodafone. Post

enactment of the amendment in view of the adverse impact on FII and FDI,

Shome Committee was asked to revisit the same. The Shome Committee

has made recommendation to not to make retrospective amendment. The

Finance Bill, 2013 is silent on this issue. The Vodafone case controversy

still continues to be a major issue with the foreign investors in view of the

retrospective amount which led to uncertainty in the law. The Finance

Minister in his Budget speech though has stated that he will improve

communication of policies to remove any apprehension or distrust in the

minds of investors but in the absence of any categorical statement about

the retrospective amendment in the law, fears about undue regulatory

burden and application of tax law continues with the foreign investors.

I. MISCELLANEOUS

1. Pass through status to Alternative Investment Fund on the line of

Venture Capital Fund

Venture Capital Fund/Venture Capital Company registered with SEBI as

Category-I – Alternative Investment Fund under the Alternative Investment

Fund regulations have been granted pass through status on the line of pass

through status granted under Section 10(23FB) to Venture Capital

Company and Venture Capital Fund from investment in a Venture Capital

Undertaking. However the income arising or received by a person out of



the investment made in such Fund shall be taxable in his hands under

Section 115-U of the Income Tax Act. Under this Section 115-U, the

income paid by a special fund is deemed to be of the same nature and in

the same proportion in the hands of the person receiving such income as it

has been received by, or had accrued or arisen to the Company or Fund

during the previous year as the case may be.

2. Income of Investor Protection Fund of depository to be exempt

The Finance Bill, 2013 proposes to introduce a new sub-section (23ED) in

Section 10 to exempt income of the Investor Protection Fund of depository

similar to the exemption provided under Section 10(23EA) of income

received by an Investor Protection Fund set up by the recognized Stock

Exchange. The exemption will be available to such Investor Protection

Fund which is set up by the depository in accordance with the regulations

prescribed by SEBI. Further it has been provided that any amount standing

to the credit of the Fund if it is shared wholly or partly with a depository

then exemption will not be available in respect of the amount so shared

and the same will be deemed to be the income in which such amount is

shared. Thus the Investor Fund so created by the depository has to be

maintained exclusively and is not to be shared with the depository.

3. Income of National Financial Holding Company Ltd. to be exempt

The Finance Bill, 2013 has proposed to insert a new sub-section (49) in

Section 10 to provide that the income of National Financial Holding

Company Ltd. which is a company set up by the Central Government shall

be exempt commencing from the assessment year 2014-15. This

exemption is continuation of the exemption provided to the Specified

Undertaking of the Unit Trust of India which has been wound up and is

succeeded by this new company called National Financial Holding Company

Ltd.

4. Time period for recognized Fund to obtain exemption from

Provident Fund Commission being extended



As per the existing provisions, for a Provident Fund to obtain recognition

under the Income Tax Act, such Provident Fund should be notified by the

Central Provident Fund Commissioner under Section 1(4) of the Employees

Provident Fund and Miscellaneous Provisions Act, 1952 and such Fund

should have exemption under Section 17 of the said Act. The Finance Act,

2006 had inserted that this notification and the approval should be

obtained by 31st March, 2007 by the existing Provident Fund otherwise

recognition of such Fund shall be withdrawn. Considering the fact that such

notification and approval has not been granted so far by the Provident Fund

Commissioner to a large number of Funds, year after year this deadline is

being extended. The Finance Bill, 2013 proposes to extend this deadline of

notification and obtaining exemption from the Provident Fund

Commissioner from 31st March, 2013 to 31st March, 2014.

VED JAIN AND ASSOCIATES Tax, Audit and Advisory

http://www.vedjainassociates.com

New Delhi Chandigarh

33, First Floor, Babar Road SCO 345-346 Bengali Market, Sector 35-B New Delhi Chandigarh +91 11-23354546 +91 172 2605553

http://www.vedjainassociates.com/

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